Archives for Planning

Many of us have gotten comfortable with paying our monthly bills online, so it is surprising that, in our practice, we see very few clients electronically making their quarterly estimated tax payments. It is very easy to do so, and every bit as secure as paying your credit card or electric bill. Recently the IRS rolled out the new Direct Pay service for individuals to make their quarterly estimated tax payments. This service can also be used to pay an individual tax bill, but is available only for taxpayers who use a Social Security Number (SSN) rather than a Taxpayer Identification Number (TIN). For more information, including plans for enhancements to Direct Pay, click here:

Of course, electronic payment of federal estimated income taxes through the Electronic Federal Tax Payment System (EFTPS) has been available for quite a while. The service is free and you can pay by phone as well as by using the Internet. Additionally, the service is available for payment of all federal taxes, not just quarterly estimated taxes. EFTPS can also be used for paying business taxes.

With EFTPS, you can schedule payments up to 365 days in advance and access up to 16 months of payment history. The system is secure and includes verification steps which allow taxpayers to review their information before it is sent. EFTPS is available 24 hours a day, 7 days a week, whether you are making payments by Internet or phone.

For a complete description of the EFTPS and to enroll, click on this link:

Currently in Virginia, there is no system equivalent to the federal Direct Pay system, but taxpayers can access VATAX Online for payment of taxes. VATAX Online offers many of the same features as EFTPS and divides its services between individuals and businesses.

Now that you are away from the immediate crush of tax preparation, consider making time for a personal financial tune-up. Assure that your current strategies will provide for the future that you envision.

Collect and organize all of your financial information so that the information is close-at-hand or easily retrievable when required. This will assist with determining that your assets are adequately protected, that you have funds available for emergencies, and that you are on track with your retirement goals. Be sure that someone you trust knows where the information can be found and how to access it.

Review your documents to make sure that all of your assets are titled as you want them to be and that all of your beneficiary designations are up-to-date. You may have had recent events in your family or financial situation that would necessitate a revision of your current legal documents, or for drafting another instrument to define a new goal. Ensure that your plans for the future are reflected in your written designations, including your will, trusts, and any other directives pertinent to your life.

Determine what your objectives are to meet your future financial goals. You may be planning for a home or investment purchase, funding education for children or grandchildren, or working toward a legacy fund for a favorite charity, while simultaneously looking ahead to retirement.

We are available to advise you concerning your financial tune-up. We can determine the impact that changes in the law have on your current income tax situation, and make tax projections for planning purposes. We will team with you, your attorney, investment advisor, financial planner, family members, and any other counselors, to develop a composite plan to make your financial goals realizable.

Many people often bypass the use of Roth IRAs in their retirement planning because of the absence of an upfront tax deduction. Therefore, many individuals choose to only fund their retirement with pre-tax contributions to a Traditional IRA and/or their company qualified retirement plan. After all, we were taught in economics 101 that a dollar saved today is more precious than a dollar saved tomorrow; plus deferring taxable income is often a prudent course of action. These tenets are important and rightfully given appropriate consideration, but should not serve as the only fundamental rules in your retirement plan. The following discussion points are intended to shed some light on Roth retirement vehicles and how/why to incorporate Roth’s into your retirement blueprint.

The Basics

A Roth IRA is an individual retirement savings account funded with after-tax dollars. Meaning contributions are not tax deductible, but subsequent qualified retirement age distributions are completely tax-free. For the 2013 tax year, you can contribute $5,500 ($6,500 if age 50 or older by December 31) to a Roth IRA. Contributions cannot exceed taxable compensation and are subject to phase-outs based on your modified adjusted gross income (MAGI). For 2013, the MAGI phase-out ranges from $178,000 – $188,000 for a joint return and $112,000 – $127,000 for single/head of household filers (special rules apply for married couples filing separately). Additionally, a spouse (filing jointly) may be able to contribute to a Roth IRA even if he/she had no taxable compensation.

Identical to traditional IRAs, contributions can be made for a tax year up until the original due date of your federal tax return (generally April 15th). Unlike traditional IRAs, contributions can be made beyond reaching 70 ½ years old and required minimum distributions are never imposed on a Roth. This can sometimes prove to be a significant advantage in terms of your estate planning.

In addition to Roth IRAs many qualified retirement plans such as 401(k) and 403(b) plans offer a designated Roth elective deferral option as well. Allowing the plan participant to contribute funds on a post-tax basis without the roadblock of income limitations associated with Roth IRAs.

Contribution Strategy for High Income Individuals

If you are not able to utilize a Roth 401(k) to circumvent the income limitations there is still another avenue to make Roth contributions. An individual can simply make a non-deductible Traditional IRA contribution and exercise a subsequent conversion (Roth Conversions discussed below) to a Roth IRA. Non-deductible contributions are allowable to a traditional IRA (if you have taxable compensation) up until the year you reach 70 ½ years old.

Roth Conversions

When converting assets held in a traditional IRA to a Roth you are essentially changing the tax treatment in which your retirement savings are held. The downfall is that you have to pay the tax bill on the conversion amount to convert the funds into post-tax dollars. As a result, the qualified distributions during retirement are completely tax-free (including the capital appreciation). One strategy that savvy individuals may employ from year-to-year is segregating their Roth conversions into several different accounts and evaluating the performance of each conversion individually to determine if recharacterizing or “undoing” the accounts back to traditional IRAs is desirable. Recharacterizng should be a consideration if the value of the assets converted has deceased since the original conversion date. Roth IRA conversions are great strategies, but should be carried out under the advisement of a CPA and/or financial adviser.

Tax Diversification

By only contributing to tax deferred retirement accounts you are not achieving the essential goal of tax diversification. Tax diversification is the strategy of investing in accounts with different tax treatments such as taxable, tax-deferred (i.e. traditional IRA) and tax-free (Roth IRA). By having your retirement savings spread out among these different accounts, it provides necessary flexibility needed for tax planning in your golden years.

We thought it might be a good idea to give you a CPA’s view of these upcoming “events” and some possible ways to approach your year-end tax planning.

The fiscal cliff that everyone is talking about is actually a combination of several tax and spending law changes that are scheduled to take effect on January 1, 2013. The spending cuts are a result of the Budget Control Act of 2011 and its’ required automatic budget sequestrations. The tax law changes that are contributing to what many are calling the “fiscal cliff” or “taxmageddon” are the result of expiring tax law provisions that gave taxpayers additional deductions, credits and lower tax rates in the current and prior years – many of which are scheduled to expire on January 1, 2013.

So what to do before then? First of all, keep an eye on what Congress and the President propose between now and December 31st. By looking at both the President’s proposal and any specific proposals that Congressional leaders may offer, we may be able to glean some direction.

Next, review the changes that are scheduled to take place if no action is taken by Congress before January 1st. Here’s a brief list of the major changes:

Long term capital gains will be taxed at higher rates – up to 20%, instead of the maximum 15% of pre-2013 years.

Qualified dividends will be taxed at ordinary income rates, instead of the pre-2013 maximum rate of 15%.

Estate and gift tax rates increase to a maximum rate of 55%, instead of the 35% pre-2013 maximum rate.

The amount of tax-free transfers to other individuals by gift or through inheritance will be capped at $1 million, instead of the current cap of $5.12 million.

The cap on the allowable write-off of business furniture, equipment and qualified leasehold improvements in the year of purchase, sometimes called Section 179 expensing, will decrease from $139,000 in 2012 to $25,000 in 2013.

Bonus depreciation, another accelerated method of deducting the cost of business furniture, equipment and qualified leasehold improvements, will expire at the end of 2012.

Please contact us to discuss planning opportunities and estimate the effect the possible tax law changes will have on your income tax liabilities for the coming year. We don’t have a crystal ball to predict what will happen, but we will be able to prepare you for the possible changes.

Recently, I was asked by my dad to look into different ways that he could use some investment funds that are not providing a good rate of return. He also wanted to do something that could be beneficial to his grandchildren. We looked into the Virginia 529 Plans to see if they were a good fit for him. Although I already knew that 529 plans were a good idea, I learned a few new things as well:

Some 529 plans College Savings Plans can benefit people of any age who are pursuing higher education and can be established at any time.

Some 529 plans can be used for schools in other states.

Some 529 plans can be established online or at a local bank.

Virginia currently has four different plans: a pre-paid education plan, an education savings trust that can be established online, a College America plan that utilizes a broker, and a College Wealth plan that can be set up through certain banks. The requirements and restrictions vary for each plan.

Most exciting for my dad was the fact that he can deduct up to $4,000 per year in contributions per plan from his Virginia taxes. Any remaining deduction will carryover each year until it is used up. Another plus is that once he turns 70, he can deduct the full amount of contributions, which will be helpful when he is required to start taking an annual minimum distribution from his 401(k).

So, if there are any grandparents (or parents) out there who are looking for a better return on investment, a 529 plan might be a good place to start looking. After all, an education is “priceless”.

Deciding when should you start collecting Social Security is a complex decision with many factors to consider.

When you work and pay FICA taxes, you earn credits toward Social Security retirement benefits. You can earn up to four credits per year and the credits are based on your annual earnings. Once you have acquired forty credits you are considered fully insured and eligible to receive benefits. Full retirement age depends on your year of birth and ranges from 65 to 67. Benefits are based on your primary insurance amount (PIA) which is calculated using your best 35 years of employment.

You don’t have to wait to start collecting benefits until your full retirement age. You could begin collecting as early as 62. However, collecting early does have some significant consequences which ought to be seriously considered. Depending on your full retirement age, collecting at 62 could result in a reduction of up to 30% of your monthly benefit amount. In addition, if you are still earning salary and wages when you begin benefits, the amount of your monthly benefit could also be reduced or withheld if your earnings exceed a certain threshold. For 2012 the threshold is $14,640. However, your benefit amount at full retirement age will be adjusted to account for withheld benefits. This earnings reduction only considers the individual’s salary and wages, not other types of income.

The Social Security Administration (SSA) rewards those who wait to begin collection of benefits. For every month you defer benefits after your full retirement age, up to age 70, you could be eligible for an up to 8% annual increase in benefits. The amount of an individual’s increase depends on their year of birth.

The SSA isn’t totally unforgiving. If you begin taking benefits and then decide you have made a mistake you can request to withdraw your application for benefits. The SSA will review your application and if approved it would be as if you had never started collecting. Of course there is a catch, you have to repay all of the benefits received to date, you must request your withdrawal within twelve months of collecting benefits and you can only request withdrawal once.

For most people the decision of when to collect benefits isn’t one that can be made in isolation. You should consider your spouse and the impact taking benefits early will have on their maximum benefit amount if they plan to take spousal benefits. Spousal benefits are benefits received based on your spouse’s PIA. You may also apply for benefits and then suspend collecting those benefits until a later date. This would enable you to still collect delayed retirement credits while allowing your spouse to collect spousal benefits. Widows and divorced spouses may be able to collect based on the record of a deceased spouse or an ex-spouse.

In the end the decision boils down to longevity, how long will you live. Since none of us knows the answer to this question you must do your best to guess. The longer you think you will live the more likely it is that delaying benefits will result in the largest total amount of benefits received.

If you have any questions regarding beginning to receive social security benefits, please contact a qualified tax professional or financial advisor/planner.

Now that another tax season has come and gone, I have been thinking about something that happened during that time that made a real impression on me. A client was widowed suddenly, and quite unexpectedly. Fortunately, her spouse had the foresight to leave some information behind that was most helpful.

We all realize that some estate planning is necessary, even if it involves nothing more than a will. But, there are many small things that can be extremely frustrating for someone already dealing with a very stressful situation. I am referring to information regarding household finances such as account names and numbers, identification numbers, passwords and phone numbers.

In many households, one spouse is responsible for all things financial. When that spouse is the first to pass away, the surviving spouse will benefit from some basic information in order to keep things moving. In addition to the previously mentioned items, many other items could be added to the list depending on the complexity of the specific household finances. In many cases, it would not be over simplification to add things like the location of the checkbook and the due date for monthly payments such as the mortgage and utility bills. It would also be helpful to know the contents of the safe deposit box and the location of life insurance policies. With some thought, many things will come to mind that will be useful.

The best part about this type of planning is that it is free. You do not need a CPA or an attorney, you can do it yourself. All information can be hand written and put in a secure place such as the safe deposit box. Just make sure your spouse knows where it is. As things change, you can make necessary additions or deletions

My experience, and the experience of my client, was that this thoughtful estate planning truly can make life easier for the one left behind.

Along the same line, while you are at it, don’t forget that advanced medical directive. You can pick one up at Martha Jefferson or UVA hospitals to complete.